What’s in a Lease? Characteristics of Long Term Tenancies of Land

The term “lease” comes up a lot in conveyancing but there is often confusion as to what exactly it is, and what it will contain. A lease is essentially an agreement whereby one party agrees to lend something to another party in return for some form of payment. It can relate to anything – a car, machinery, a television. In conveyancing transactions, the lease will be of land.

A lease of land (and any building or part of a building, such as a flat or maisonette, which stands upon the land) is a form of tenancy agreement. The terms “tenancy agreement” and “lease” are really interchangeable so a lease could be for a short term, say a 6 month assured shorthold tenancy, or for a longer term, say 99 years. Usually however the term “lease” is used to describe a “long lease”, which is a lease originally granted for a term of at least 21 years (a long lease remains a long lease even when the remaining term is less than 21 years). In the case of residential property, a long lease is usually granted for a term of 99 years.

Characteristics of a Long Lease

A lease is essentially a right to use and occupy the property to which the lease relates to the exclusion of others (including the landlord) for an agreed period of time (the term). Unlike most short term leases (such as assured shorthold tenancies) a long lease is transferable by the tenant at will. This means it can be sold, mortgaged, gifted or inherited.

A large premium will generally be payable by the tenant in return for the grant of a long lease along with a fairly nominal annual rent. Contrast this with a short term tenancy where no initial premium will be payable and instead there will be a monthly rent at market rates. If a long lease is sold then the existing tenant will assign the remainder of the lease term to the incoming owner (who will become the tenant) in return for the payment of a premium (the sale price). The incoming owner will replace the outgoing owner’s obligations under the lease, including the obligation to pay rent.

Any long lease will contain an express or implied right of re-entry in favour of the landlord in the event of the tenant’s failure to pay rent and usually in the event of any other breach of the lease terms (such as failure to pay maintenance charges or causing a nuisance to other tenants). This involves entering the property, evicting the tenant and bringing the lease term to a premature end and is known as forfeiture. On expiry of the term of a long lease the property reverts to the landlord.

Virtual Freeholds

Long leases are usually granted in respect of flats but sometimes houses will be let on a long lease too. It is not unusual in certain parts of the country, particularly the North West, to find houses let on long leases of 999 years, commencing in the 19th or earlier 20th century, at a rent of just £1 or £2. These exceptionally long leases are sometimes known as “virtual freeholds”. They are so called because, although there is a lease with a term that will eventually expire, this will be so far in the future that it will be of no concern to the tenant or indeed his descendants. The only covenants which the tenant will need to comply with will usually be to pay the rent, to keep the building insured and to keep it in good repair. The risk of forfeiture does still exist.

What Information Can Be Found in a Lease?

Once you obtain a lease it can often be a very long and seemingly very complex document and can be daunting for a non-conveyancer to read. It contains all of the terms of the agreement between the landlord and the tenant. If you do have a copy of your lease you can buy an official copy of the lease here. In particular the lease should contain:

The names of the original parties

This will be the original landlord and the original tenant. Over time both the tenant’s and the landlord’s interest might change hands but the lease document will not be amended to reflect this. Instead, the registers of title for both the freehold and the leasehold interests will be updated. It is therefore the registers of title that needs to be obtained and not the lease itself that need to be checked to find out who the current landlord and tenant are.

A description of the property to be leased (the demise)

The lease should describe the property by giving the postal address and making reference to a plan (which should be attached to the lease) which outlines the properties’ boundaries. If the property is a flat then the description of the demise should also specify which parts of the building are included in the title. For example if the flat is on the ground floor or top floor it should say whether the foundations or the roof are included or whether these form part of the “common parts” of the building. This is relevant because repair of the flat itself will be the responsibility of the tenant whereas the common parts will usually be the responsibility of the landlord (albeit with the tenant being obliged to contribute to the cost).

Lease term and start date

The term is the period of years for which the lease is granted. This should be stated in the lease which should also state the date on which the term commenced. It is worth noting that term commencement date is often earlier than the date the lease was actually granted (the date of the lease). This is to ensure that all of the leases in, for example, a block of flats end on the same date even though they may be sold on different dates.

Most residential long leases will be granted for either 99 or 125 years, though this is only a convention and does not have to be followed. Once the term comes to an end the tenant’s leasehold interest ends and the property returns to the landlord who can then sell it again. The tenant does however (at any time prior to the end of the term) have a right to have the term extended provide certain criteria, such as having owned the lease for at least 2 years, are met. Although the landlord is free to agree to a longer extension, the minimum requirement is to extend it back to 90 years if the tenant insists.

Ground rent information

Ground rent is an annual sum, usually a nominal sum, paid to the landlord for the duration of the lease term. It can either be a fixed amount for the full length of the term or can increase periodically. The increases can either be pre-defined or based on a formula (such as by reference to the Retail Price Index. The starting rent and subsequent rents, or formula for calculating increases, will be specified in the lease.

Sometimes the rent will be “a peppercorn”. In practice this is just a legal term for a zero ground rent (though the landlord would be within his rights to actually demand a peppercorn each year from the tenant!).

Rights in favour of the tenant

These will include for example a right of way of the common parts of the building and grounds to access the property, a right to use the services (pipes, cables etc.) which pass through parts of the building not included in the property), a right to enter other parts of the building if necessary to repair and maintain the flat and a right to support and shelter from other parts of the building. This list is not exhaustive.

Rights in favour of the landlord / other tenants

These are rights which the landlord and other tenants have in over the flat and will usually mirror those granted in favour of the tenant.

Covenants by the tenant with the landlord

A lease will contain a number of obligations which the tenant must comply with. Exactly what obligations are imposed will vary from lease to lease depending on the individual characteristics of the block/development however as a minimum there should be an obligation to pay rent and to keep the property in good repair.

If the property is a flat there will generally be an obligation to contribute toward the maintenance and repair of the common parts.

Covenants by the landlord with the tenant

The landlord will have certain obligations to the tenant, including covenant for “quiet enjoyment”, i.e. that the landlord will not enter the property without the tenant’s consent (except in certain cases such as emergency repairs or if the tenant is in breach of the lease covenants) and if the property is a flat, usually a covenant to insure the building and repair the common parts.

Why Have a Lease at All?

This is a question that potential buyers of leasehold properties often ask and it is a fair question. After all, when you buy a property you generally hope to acquire an asset that will steadily appreciate over time. Instead by buying a lease you have an asset that will potentially depreciate (the fewer years that are left on the term, the less valuable it becomes). Eventually the term will run down to nothing and the asset will be relinquished altogether. In fact when it comes to houses there is rarely any real justification for the property to be held on a lease but for flats the system is actually very beneficial to tenants and overcomes some otherwise serious problems.

What is key to the leasehold system is the ability to effectively enforce covenants. In a block of flats each flat owner is dependent on the other – to contribute to the insurance and maintenance of the main structure, to clean and maintain common stairways and passageways etc. Also, any anti-social behaviour by any of the flat owners such as playing loud music will adversely affect the others. Without a formal legal agreement in place it is unlikely that all of the tenants will agree on a common standard. Some will want the building to be in an immaculate state whilst others will be happy to lack it fall into decay as long their own flat is OK.

This is where the lease comes in. Under the terms of a properly drafted lease, the landlord can take possession of a tenant’s property and bring the lease to an end if the tenant fails to comply with the covenants in the lease (known as forfeiture). As long as all of the leases in a block contain the same covenants therefore, the tenants are obliged to comply with a certain minimum standard, including maintaining their own properties, paying toward the maintenance of common parts and not causing a nuisance to other tenants.

Alternatives to the Leasehold System

So if leases are all about enforcing covenants then why not own the freehold of the flat and have all of the tenants covenant with each other? Well, the law does not allow positive covenants (covenants that require some action such as to pay maintenance charge) to be enforced except between the original parties. Whereas a subsequent purchaser of a lease automatically becomes bound by the covenants entered into with the landlord by the original tenant, the purchaser of a freehold property is not bound by the positive covenants entered into by his predecessor. This means that if all of the flats in the block were freehold, each team a flat was sold the new owner would need to enter into a deed of covenant with every other flat owner and they in turn would need to covenant with him. Not only would this be a logistical nightmare in a large block but also, what if someone refused?

Furthermore the only way to enforce a breach would be for the other tenants to take the offender to Court and sue on the covenant. There would be no right to forfeiture. Getting all of the tenants to join in the action would be difficult, particularly as there is always a risk with any Court action of defeat which would leave the tenants who brought the action liable for all of the costs.

Condominium Arrangements

The leasehold system is pretty much unique to the UK. In other countries, such as the USA, flats are either rented or else the freehold is purchased and is subject to a Condominium Agreement (you may have heard the term “condo” on American TV shows – this is where it comes from). This is an agreement entered into by each of the flat owners which is essentially a set of mutually enforceable covenants.

Commonhold

Commonhold is the UK’s answer to condominium agreements. Introduced in 2003, it is a new form of land ownership, whereby each flat in a block (or house on an estate) is known as a “commonhold unit” and each flat/house owner owns the freehold of his commonhold unit. The common parts are owned by a company called a “commonhold association” which is in turn owned equally by the commonhold unit holders.

The commonhold association is governed by a set of rules contained in a “commonhold community statement”. This statement contains rights and covenants similar to those found in a long lease, such as a covenant to pay maintenance charges, rights of way and restrictions on nuisance behaviour such as playing loud music. Each unit holder must sign up to and comply with the commonhold community statement and the commonhold association can impose sanctions on those who do not comply, including financial penalties.

What a commonhold association cannot do is take possession of a commonhold unit, though it could secure a debt, for example for unpaid maintenance charge, as a charge against the property by way of a charging order.